Just Starting Out… With $140,000 Capital. Strategic Advice?

Question

TL;DR: If you were just starting out, with basically zero debt and costs, a low six-figure salary, and $140,000 to invest, with a desire to get into real estate, “connections” to a team of contractors and a great real estate agent specializing in distressed investment properties… What would you do?

Background:

I have a low six-figure salary and managed to save $140,000 over the last four years. This $140,000 is after leaving a safety cushion, etc, for myself. I want to get into real estate and already looked at a few houses the other day, with an agent who I trust and is on the same page. I’m receiving advice and help from family members, the agent, my financial advisors, and I’m reading books, watching YouTube videos, listening to podcasts, reading BP forum posts and other websites, etc. I’ve been “studying” real estate investing for a few years now.

I’m close to making a purchase - as soon as I find a deal that financially “makes sense”, I want to “pull the trigger”. I’ve got my accounts set up to send the money into a title company’s escrow account, and I’m in the process of setting up an LLC. With that aside, I’m not quite sure just how I should strategize. In a few months I’ll be living with family and paying $0 rent, which will boost my savings by over $2000 a month, though eventually I’ll want my own space - I’ll probably house hack, once I’ve picked an area I’d like to live in for a few years.

What I’m not sure on is, how I should handle financing my first (and subsequent) property purchases. I have enough money to buy a property in cash ($140,000), but the problem I foresee is that my capital will all be tied up in equity. I’d like to be able to borrow against that equity, by either using a HELOC or getting a low interest rate mortgage against the property, however from my research I’ve found that it’s not very “easy” to get one’s capital out of a property “quickly”. It seems I either have to wait half a year for “seasoning” (that Fannie Mae thing) so that I can apply for financing and get a mortgage on the property, or I take a financial hit with deferred financing, leaving 25% of my capital as equity and recouping only 75% - this seems to especially suck since I wouldn’t be able to take advantage of a hypothetical higher-than-purchase-price ARV.

Another strategy I saw, by one of the Kwak brothers, was to buy a “nicer” home, then use the equity from that in the form of a HELOC, in conjunction with savings, to buy several rentals. Then divert the income from the rentals to pay down the HELOC, and then focus on paying down the principal on the various investment properties’ debts, ideally creating a snowballing effect where multiple properties help pay each other off.

Do people just “bite the bullet” and accept slower business timelines when they only have enough capital to purchase a single property at a time? Obviously if I could use leverage to buy distressed homes, I’d be in a much better position, as my $140,000 could then be split among several down payments. But from all the research I’ve done, it seems I really want to be making cash offers with 100% of the home value. Which, I can do, but then, like I said above, will leave all my capital tied up for quite some time.

I would appreciate any tips and all advice!

Joseph Burger · Answer

Just an update...

I've since found out that delayed financing is performed using the current value of the home.

Which means, all the various forum results I've viewed, as well as other media, which were all saying that delayed financing is based on the purchase price of the property plus the closing costs, were technically correct... Assuming one applies for delayed financing before renovating the property.

To me, this is GREAT news. It means I can buy and upgrade a property with cash, and then apply for delayed financing and take advantage of delicious "conventional" mortgage rates. Sure, the Fannie Mae stipulation says that the borrowed amount to be mortgaged can't exceed 75% of the property's current value... But that's current, aka AFTER REPAIRING AND UPGRADING THE HOME. Therefore, it's still possible to recoup all the capital invested in a property, not just 75% of the capital.

If anyone thinks I'm wrong or knows otherwise, please let me know, as otherwise I'm very pleased with this new knowledge. It means I could potentially not slowly run out of capital as I delayed financing from one "flip-and-hold" to the next.

In reality, I doubt that in the current market, and with the low availability of good deals, I'll be able to find a property which I can then add 25% appraisal value to, for less than 25% of the value spent as repair/renovation costs. But at least there's a chance, and it could land somewhere between 75% and 100%, which is an improvement. Judging from what I've read about appraisals and appraisers, it seems I shouldn't get my hopes up for dramatically increased appraisal values post-renovation.

Ryan Kelly · Answer

@Joseph Burger my advice is to keep it simple and take action as soon as you can. You can't learn to ride a bike watching YouTube, you have to get on and pedal. I recommend buying your first primary home, whether it be a single-family home or duplex, and then getting roommates to absorb some of the cost. This simple house hack will be your training wheels to get used to all the moving parts of real estate (utilities, taxes, insurance, appreciation, depreciation, cash flow, etc). You won't need an LLC for your primary home and you can also use beneficial primary home financing with lower interest rates. You'll get the hang of real estate much quicker than 1,000 more videos can teach you. The quicker you get started, the faster you'll be ready for your next steps. Good luck and make your move!

Conner Olsen · Answer

@Joseph Burger I think early in your investing career you should focus on appreciation more than cash flow. The Midwest is always enticing because you get better returns than other places but the appreciation is not always there. My strategy is to buy in a rapidly appreciating market and figure out how to increase cash flow and I do that by renting my property monthly on Airbnb. I'm able to get the insane appreciation of the Austin market while still cash flowing. Once I get further in my investing career cash flow will be more important and I'll start purchasing in higher cash flow areas. Hope that helps!

Jon Kelly · Answer

@Joseph Burger you have many options. With the connections you have I would target distressed properties. You can either just go the BRRRR method. Or, you can househack and BRRRR. Depending on your market you may have enough capital for the househack down payment (3-5%) and rehab costs, AND the funds to purchase a BRRRR type property.

With the BRRRR method your capital is tied up until you complete the renovations and refinance. You can often find lenders with no or low "seasoning period," which means you can refinance after 0-6 months after purchasing the property.

Another great way to choose your path is to actually run numbers on different scenarios. Instead of guessing which strategic will lead you to the promised land, you should use the BP calculator and run numbers on BRRRR vs. "nicer" Buy-and-hold.